The Iceland Report

Blöggt er gests augað

föstudagur, mars 12, 2010

some numbers

Yesterday I published an article in Morgunblaðið. Here is roughly the same article in English.

In the discussions about the collapse of the Icelandic banking system that have taken place since October 2008, very little has been said about the size of the collapse of the three banks, in either absolute or relative terms.

This is unfortunate, as without a sense of perspective for these large bank failures, Icelanders have a hard time understanding the magnitude of what befell our small economy. We also have a hard time explaining the size of the systemic failure when discussing the banking collapse with foreign parties. This does everyone a disservice, as these bank failures are historic events not just for Iceland, but for the whole world, and need to be understood in that context.

Here are a few numbers I have compiled, to put the crisis in some international perspective. At the end of June 2008, about 3 months before the banks fell, the combined assets of the three largest banks – Kaupþing, Landsbanki, and Glitnir – were 14 times larger than the gross domestic product of Iceland.

These banks were not just large relative to the GDP of Iceland – they were also large institutions by international standards. Let‘s first look at the three banks as one for a moment. After all, the three were often lumped together by many market participants outside of Iceland, and they all collapsed within days of each other. One way to measure their absolute size is their combined assets at failure. That amount as of June 2008 was 182 billion U.S. dollars. The size of these banks was thus very large even in a British or American context.

In autumn 2007, in a story that made news around the world, British savers queued in the streets to withdraw their money from Northern Rock bank. To stem that run on the bank, the British government was forced to step in and guarantee deposits. Ultimately Northern Rock was nationalized. The size of the Icelandic Three place them in a league with this famous British failure: the combined size of Iceland’s three banks was more than 80% as big as Northern Rock at the end of 2007.

On the other side of the Atlantic, the combined bankruptcy of the three Icelandic institutions would place them third in the all-time list of the largest U.S. bankruptcies. Only Lehman Brothers Holdings and Washington Mutual are bigger and those bankruptcies also unfolded at nearly the same time as the Icelandic collapse. If we compare the combined failure of the three Icelandic banks to pre-2008 bankruptcies, they would actually rank as by far the largest American bankruptcy of all time, 75% bigger than the collapse of WorldCom in 2002.

Taken individually, the absolute numbers are just as staggering. Kaupþing, for example, was almost 30% bigger than Enron, when that famous company went bankrupt, and Enron at that time was the seventh largest company in America. Landsbanki and Glitnir were each around 25% bigger than the recent bankruptcy of Chrysler.

To put this in some relative perspective, imagine if a crisis of similar magnitude had befallen the United States or the United Kingdom. What transpired in Iceland at the beginning of October 2008 would be the equivalent of more than 140 Northern Rock failures in the U.K., or the same size as almost 300 Lehman Brothers Holding companies going bankrupt all at the same time in the United States. (The size of the U.K. economy in 2008 was around 175 times bigger than that of Iceland, and that of the U.S. around 1100 times bigger.)

Between mid-September and the end of 2008, the S&P 500 Index in the United States fell from around 1200 to just below 900 points, and this was described as a horrifying market crash in the financial press. Imagine instead if that index had fallen to below 100 points. The FTSE 100 in the UK would have had to fall from over 5000 to below 500 points.

I am hopeful that these comparisons will help those of us here in Iceland understand the magnitude of the Icelandic banking crisis in world terms.